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Income Tax Appellate Tribunal, DELHI ‘G’ BENCH,
Before: SHRI H.S. SIDHU, & SHRI N.K. BILLAIYA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the Revenue is preferred against the order of the Commissioner of Income Tax (Appeals)-XXVI, New Delhi dated 28.07.2014 pertaining to assessment year 2010-11.
The substantive grievances of the assessee read as under:
“1. The Ld. CIT(A) has erred in deleting addition of Rs. 51,22,350/- on account of sundry creditors and Expenses Payable without appreciating the facts that the assessee has adopted cash system of accounting for receipts and sub commission and other expenses were accounted on mercantile basis whereas, hybrid system of accounting is not permissible as per Income Tax Act, 1961.
2. The ld. CIT(A) has erred in deleting addition of Rs. 10,99,132/- u/s 40(a)(ia) without appreciating the facts that the assessee has not deducted TDS on such payments covered u/s 194C.
3. The ld. CIT(A) has erred in deleting addition of Rs. 12,84,820/- on account of capital gains.
4. The ld. CIT(A) has erred in restricting the addition of Rs. 2,93,510/- to Rs. 1,46,755/- on account of personal expenses.”
Briefly stated, the facts of the case are that the assessee is a proprietor of M/s Chopra Promoters and Developers and M/s Chopra Estate Agents engaged in the business of real estate. Return for the year under consideration was selected for scrutiny and accordingly, statutory notice was issued and served upon the assessee. During the course of assessment proceedings and on perusal of the audit report in Form No. 3CD, the AO observed that the assessee has been following cash system of accounting for commission receipts whereas sub commissions and other expenses were accounted on mercantile basis. The AO was of the opinion that the assessee is maintaining account on hybrid system of accounting and, therefore, violated the provisions of section 145 of the Act. The assessee was asked to explain the same. In its reply, the assessee stated that all the incomes and expenses were taken on accrual basis and the auditors have reported otherwise.
Heavily relying upon the remarks of the auditor, the AO considered the expenses shown as liability in the balance sheet amounting to Rs. 51,22,350/- and disallowed the same.
The assessee carried the matter before the CIT(A) and reiterated its contentions. After considering the contentions of the assessee, the CIT(A) observed as under:
“5.1 I have carefully considered the fades of the case, submission of the appellant and perused material on the record. The maintenance of regular books of accounts which are duly audited is not questionable. The entire basis for rejection of books of account is the Auditor's comment in column 11(a) of the Tax Audit Report in Form 3CD of the Income Tax Rules. I have perused the Tax Audit Report in Form 3CD and find merit in the appellant's submission that the AO has not only appreciated the entire comments in column 11(a) but also relevant and overlapping comments in columns 11(b), 11(c) and 11(d) of the Tax Audit Report in Form 3CD. The Auditor's comment in column 11(a) of the Tax Audit Report in Form 3CD reads as under:
"Generally cash system of accountancy had been adopted for commission receipts. However sub-commission and other expenses have been accounted for on mercantile basis. It had been explained during the course of audit that normally commission receipts are realized on its accrual on happening of transactions."
From perusal of comments in columns 11(a), 11(b), 11(c) and 11(d) 5.2 of the Tax Audit Report in Form 3CD; it is evident that there is no time lag between accrual and realization of commission income; however, expenses are being accounted for on accrual/mercantile basis. Undisputedly, the commission/ brokerage paid to the appellant (The appellant is an agent dealing in real estate.) by the payer is subjected to service tax and TDS, normally done on accrual/mercantile basis. Normally, events, accrual and realization of commission income happen at the same time. As per the TDS details/26AS, no anomaly was noticed by the AO in receipt of commission by the appellant as the AO failed to point out any income escaped to be accounted for. The appellant is consistently following the same method of accounting over the years which have been accepted, in past, by the Department. Since the AO has not drawn any adverse view on the Auditor's comments in the Tax Audit
Report in Form 3CD. Therefore, it can be inferred that the comments of the Auditor in the Tax Audit Report in Form 3CD have to be accepted in totality/entirety and not in piecemeal.”
The CIT(A) observed that if the AO’s contention is accepted, then the expenses paid during the year under consideration which were claimed as liability in the immediately preceding previous year would have to be allowed. Similarly, the income which has been shown as receivable in the earlier year has to be included in the year under consideration on receipt basis. This exercise would be tax neutral.
Drawing support from the judgment of the Hon'ble Madras High Court in the case of Standard Triumph Motor Co. Ltd 119 ITR 573 wherein it has been held that the provisions of section 145 are only machinery provisions and it cannot override the charging provision and further drawing support from the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Excel Industries Ltd 358 ITR 295 order dated 09.10.2013, the CIT(A) directed the AO to delete the disallowance of Rs. 51,22,350/-.
The ld. DR strongly supported the findings of the AO.
Per contra, the ld. AR reiterated what has been stated before the lower authorities.
We have considered the rival submissions and have carefully perused the orders of the authorities below. There is no dispute that the observations of the auditor are in contradiction to the submissions made by the assessee. It is equally true that if the earlier years expenses are allowed during the year under consideration and if the earlier years receipts are excluded from the income of the year under consideration, the whole exercise would be revenue neutral. There is no dispute that the receipts shown by the assessee are matching with Form No. 26AS filed by the deductor of TDS. In our considered opinion, income statement of the assessee does not give any distorted figure. In any case, the expenditure incurred by the assessee for earning income has to be allowed. In any case, legitimate expenses incurred by the assessee in earning income has to be allowed and once the income has been accepted as such, and taxed accordingly, the matching expenditure has to be allowed. We, therefore, do not find any reason to interfere with the findings of the CIT(A). Ground No. 1 is dismissed.
Facts relating to the grievance raised by the assessee vide Ground No. 2 show that the AO found that the assessee has claimed Rs. 9,96,493/- on account of business promotion expenses and on perusal of the details, the AO noticed that the assessee has made payment of Rs. 10,99,132/- to ITC Maurya Hotel, New Delhi. The AO was of the opinion that since the assessee has not deducted tax at source as per section 194C of the Act, he disallowed the payment of Rs. 10,99,132/- u/s 40(a)(ia) of the Act.
Before the CIT(A), it was strongly contended that the AO has misconstrued the nature of expenditure in as much as the said expenditure was not within the provisions of section 194C of the Act.
After considering the facts and submissions, the CIT(A) observed that the payment to hotel is not covered by the provisions of section 194C of the Act as it is not in the nature of catering. The CIT(A), accordingly, deleted the disallowance of Rs. 10,99,132/-.
14. The ld. DR strongly supported the findings of the AO.
Per contra, the ld. AR reiterated what has been stated before the first appellate authority.
16. We have given thoughtful consideration to the orders of the authorities below qua the issue. In our considered opinion, the facilities/amenities made available by a hotel to its customers do not constitute “work” within the meaning of section 194C of the Act, therefore, we do not find any reason to interfere with the finding of the CIT(A). Our view is fortified by the judgment of the Hon'ble High Court of Bombay in the case of The East India Hotels Ltd & Anr. Vs. CBDT 320 ITR 526. Ground No. 2 is accordingly dismissed.
Facts relating to Ground No. 3 show that during the assessment proceedings, the AO noticed that the assessee has declared long term capital loss of Rs. 14,13,075/- on account of sale of property. On perusal of the details submitted by the assessee, the AO found that the assessee has shown his share of cost of acquisition of the said property at Rs. 65 lakhs. However, on scrutiny of the purchase deed, the AO found that the cost of acquisition of the said property on assessee’s share comes to Rs. 56.76 lakhs. The assessee was asked to explain why the difference should not be added to the income of the assessee. In its reply, the assessee explained that no sharing ratio was decided in the purchase deed and since the assessee has invested Rs. 65 lakhs he has taken the same as his cost of acquisition. The contention of the assessee was dismissed by the AO who concluded by making addition of Rs. 12,84,820/-.
Before the CIT(A, the assessee reiterated what has been stated during the assessment proceedings and contended that the exercise would be Revenue neutral.
19. After considering the facts and submissions, the CIT(A) observed that in case the capital gains in the hands of the assessee is enhanced, then the consequential capital gains in the hands of the co-owner has to be reduced and since both of them are taxed at the highest rate of tax, the exercise would be tax neutral. The CIT(A), accordingly, directed the AO to delete the addition of Rs. 12,84,820/.
The ld. DR could not add anything new to what has been done by the AO.
15. Per contra, the ld. AR relied upon the findings of the CIT(A).
We have given thoughtful consideration to the orders of the authorities below qua the issue. If the contention of the AO is accepted, then the working of capital gain tax would be as under:
Particulars Pran Nath Sunil Chopra Total Total Cost of 48,51,000/- 65,01,750/- 1,13,52,750/- Chopra Purchase 27,79,510/- 28,92,125/- 56,91,635/- {Cost of Construction 76,50,510/- 93,93,875/- 1,70,44,385/- Total 1,16,00,000/- 1,16,00,000/- 2,32,00,000/- Sale Consideration 39,49,490/- 22,06,125/- 61,55,615/- Profit on sale of Plot as per our working 27,62,998/- 33,92,617/- 61,55,615/- Profit on sale of Plot as per ITO working 2,37,298.40/ 2,37,298.40/- 0.00/- Capital Gain Tax @20%
17. A perusal of the aforesaid chart clearly shows that the entire exercise would be tax neutral. Therefore, to put an end to unnecessary litigation, we decline to interfere with the findings of the CIT(A). Ground No. 3 is dismissed.
18. Last grievance of the Revenue is that the CIT(A) has erred in restricting the addition of Rs. 2,93,511/- to Rs. 1,46,755/- on account of personal expenses.
A perusal of the assessment order shows that the AO has disallowed Rs. 2,93,511/- on finding that the assessee has claimed deprecation on cars and the personal usage of the same cannot be ruled out.
When the matter was agitated before the CIT(A), the CIT(A) found that the disallowance of 10% of the expenditure would be suffice to meet the assessee’s personal/non-business expenditure. Accordingly, disallowance was restricted to Rs. 1,46,755/-.
21. Since the AO has made adhoc disallowance and since the first appellate authority, in his wisdom, has directed the AO to restrict the disallowance to 50% of the total disallowance, we do not find any reason to interfere with the findings of the CIT(A). Ground No. 4 is also dismissed.
In the result, the appeal of the revenue in is dismissed. The order is pronounced in the open court on 03.07.2018.